The road to profitability

A strong partnership with the customer was key to landmark 777 sale

BY LEWIS BRINSON


Despite the downturn in the airline industry and operating a nearly bankrupt airline in 2001, Pakistan International Airlines' management team now is aggressively implementing short- and long-term strategies to return to profitability by renewing its fleet. This journey to profitability began in 2002 with the acquisition of eight new Boeing 777s.

Mission: Impossible

For many years airplane industry officials said Pakistan International Airlines would not return to profitability, renew its fleet or extend its route network. But PIA's management team persevered. After years of working together with Boeing, an airplane selection process involving a six-member PIA Board aircraft acquisition committee chose Boeing over the competition as the manufacturer of its new fleet. For those involved in this process, the decision was extremely gratifying.

"The Boeing Company is a true partner," said Ahmad Saeed, managing director, Pakistan International Airlines. "They have contributed solutions and assisted in putting together an effective fleet-replacement plan to enhance our airline's continued growth and improved profitability for the next six years that includes the high-technology 777 family of airplanes."

Admittedly, it was a very long process, but the Boeing sales team's efforts paid off. The team brought home one of Boeing's largest airplane orders in 2002, and PIA became the first airline to order the 777 "family" of airplanes, launching the 777-200 Longer Range in the process.

"Placing new aircraft in an airline's fleet means more than just selling airplanes," said J. Miguel Santos, director of International Sales for Boeing Commercial Airplanes. "It means partnering, preparing and participating in long-term 'working together' packages with a customer."

The Boeing International sales team, led by Santos, worked extensively with both the government of Pakistan and PIA to develop a comprehensive fleet-replacement strategy to support PIA's business plan. That plan includes serving new international and domestic routes, improving passenger comfort and providing more point-to-point service that links Pakistan to the rest of the world.

"We negotiated a strong contract that will provide the foundation for a firm, long-term partnership between our two companies," said Glen Green, regional contracts director, Boeing Commercial Airplanes, and a member of Santos' team. "After months of long, extensive discussions and negotiations, both parties were proud that we had reached a "win-win" contract for both sides."

Collective airplane contract agreements such as the one negotiated with PIA can include working with the government of a country to help increase economic growth in the form of an industrial partnership program; providing long-term fleet support; sharing new technologies, which have become part of this contract; providing highly skilled training, which will begin before 2005; and helping to foster new business opportunities for the airline.

"Because the plan also included support to help finalize and set the strategic and competitive direction for PIA's success, forging a deal was neither easy nor simple," Santos said.

Big governments, big deals

The 777 acquisition by PIA is a demonstration of the strong relationship between the United States and Pakistan, which extends beyond the current geopolitical environment. Recent business developments between the two countries have created a much stronger relationship—ultimately benefiting both the governments and companies within those countries.

Pakistan and the United States recently signed an agreement for the cancellation of a $1 billion debt Pakistan owed the United States. This debt relief significantly added to the momentum of Pakistan's economic recovery by allowing the Pakistan government to focus its budget on critical social priorities identified in its airline-recovery plan.

In addition, Citibank financed the majority of the 777 purchase with a loan guarantee from the U.S. Export-Import Bank. There was minimal contribution by the Pakistani government because of PIA's strong operational record. The Karachi-based carrier managed a mixed fleet of 46 aircraft that included Boeing 707, 737 and 747 models as well as Airbus A310 and A300 and Fokker F-27 aircraft.

In October 2002, the airline signed a definitive agreement for three 777-200 Extended Range, two 777-200LR and three 777-300ER airplanes for use on PIA's planned long-haul routes.

"After a thorough and objective evaluation of new, used and lease 777 alternatives, we reached a solution with new 777s that builds on the right recovery strategy for PIA," Santos said.

An eye on the future

Despite the financial challenges PIA faced, the airline identified an aggressive route-expansion plan. PIA specified new long-haul routes that linked Pakistan to Europe, the United States and the Far East. The carrier also had an eye on pursuing regional short- and medium-range routes to better serve the Middle East, the Gulf region, South Asia and domestic routes; new feeder routes for undeveloped areas of Pakistan; and strengthened operations for its cargo markets.

With a fleet that had an average age of 23 years, PIA also set timetables for phasing out its aging aircraft. The carrier plans to retire two 747-200s, eight A300s and eleven F-27s in 2003; two 747 combis in 2006; three 747-300s in 2008; and seven 737-300s in 2010 and 2011.

"Patience, commitment, perseverance, consistency of purpose and teamwork are critical elements to our long-term relationship with PIA," Santos said.

"We look forward to continue to participate in the next stage of their success, not only with the new airplanes, but also with a continuing expansion of the close working relationship between our two companies."

lewis.b.brinson@boeing.com